Complementarities in Consumption and the Consumer Demand for Advertising

We use a new dataset that links the TV ad consumption behavior of a panel of consumers with their product choice behavior to measure the co-determination of demand for products and advertising. Leveraging the variation in the data, we assess how a household’s ad-skipping behavior responds to product consumption. We find that ad-skipping is lower when the household has purchased more of the brand in the past, all things held equal. Under an exclusion restriction that product prices do not affect the utility from consuming advertising directly, this result provides support for Becker and Murphy’s (1993) theory that advertising can act as a complement to product consumption. To assess the implications for advertising targeting and welfare, we fit a structural model for both products and advertising consumption that allows for such complementarities. The model presents a more positive view of advertising relative to other frameworks. Using the model, we compare advertising, prices and consumer welfare to a series of counterfactual scenarios motivated by the “addressable” future of TV ad-markets in which targeting advertising and prices on the basis of ad-viewing and product purchase behavior is possible. We find that both profits and net consumer welfare may increase in several scenarios. This occurs because under improved targeting, firms shift advertising to those who are likely to value it, while consumers that do not value the ads end up skipping them, mitigating possible welfare losses. Both forces are relevant to assessing advertising effects in a world with improved targeting and ad-skipping technology.